Definitions of various Financial instruments

1 Bond It is a fixed income (debt) instrument issued for a period of more than one year with the purpose of raising capital.. The central or state government, corporations and similar institutions sell bonds 2 Stock Exchange

The Securities Contract (Regulation) Act, 1956 [SCRA] defines ‘Stock Exchange’ as any body of individuals, whether incorporated or not, constituted for the purpose of assisting, regulatin business of buying, selling or dealing in securities. 3 Debt Instrument

Debt instrument represents a contract whereby one party lends money to another on pre-determined terms with reg interest, repayment of principal amount by the borrower to the lender. 4 Debenture ‘debenture’ is used for instruments issued by private corporate sector. 5 Depository A depository is like a bank wherein the deposits are securities (viz. shares, debentures, bonds, government securities, units etc.) in electronic form. 6 Index An Index shows how a specified portfolio of share prices are moving in order to give an indication of market trends. It is a basket of securities and the average price movement of the basket of securities indicates the index movement, whether upwards or downwards. 7 Derivative Derivative is a product whose value is derived from the value of one or more basic variables, called underlying. The underlying asset can be equity, index, foreign exchange (forex), commodity or any other asset. 8 Dematerialization Dematerialization is the process by which physical certificates of an investor are converted to an equivalent number of securities in electronic form and credited to the investor’s account with his Depository Participant (DP). 9 Securities The definition of ‘Securities’ as per the Securities Contracts Regulation Act

(SCRA), 1956, includes instruments such as shares, bonds, scrips, stocks or other marketable securities of similar nature in or of any incorporate company or body corporate, government securities, derivatives of securities, units of collective investment scheme, interest and rights in securities, security receipt or any other instruments so declared by the Central Government. 8 Regulator The regulator ensures that the market participants behave in a desired manner so that securities market continues to be a major source of finance for corporate and government and the interest of investors are protected. 9 SEBI Securities and Exchange Board of India (SEBI) with statutory powers for (a) protecting the interests of investors in securities (b) promoting the development of the securities market (c)regulating the securities market. Its regulatory jurisdiction extends over corporates in the issuance of capital and transfer of securities, in addition to all intermediaries and persons associated with securities market. 10 Participants The securities market essentially has three categories of participants, namely, the issuers of securities, investors in securities and the intermediaries, such as merchant bankers, brokers etc.

11 Intermediary The Broker is a intermediary 12 Primary Markets The primary market provides the channel for sale of new securities. Primary market provides opportunity to issuers of securities; Government as well as corporates, to raise resources to meet their requirements of investment and/or discharge some obligation. 13 Face Value The nominal or stated amount (in Rs.) assigned to a security by the issuer. For shares, it is the original cost of the stock shown on the certificate; for bonds, it is the amount paid to the holder at maturity. Also known as par value In India every stock has now a face value of Rs 10/For a debt security, face value is the amount repaid to the investor when the bond matures (Note) The face value has nothing to do with at what price it is traded in the market that is the premimum price that one pays for that percticular scrip The Dividents are also calculated on the basis of the face value of the scrip.

14 Premium and Discount in a Security Market Securities are generally issued in denominations of 5, 10 or 100. This is known as the Face Value When a security is sold above its face value, it is said to be issued at a Premium and if it is sold at less than its face value, then it is said to be issued at a Discount. 15 Initial Public Offering (IPO) When an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public. This paves way for listing and trading of the issuer’s securities. 16 Rights Issue When a listed company which proposes to issue fresh securities to its existing shareholders as on a record date. The rights are normally offered in a particular ratio to the number of securities held prior to the issue. This route is best suited for companies who would like to raise capital without diluting stake of its existing shareholders. 17 Issue price The price at which a company's shares are offered initially in the primary market is called as the Issue price. When they begin to be traded, the market price may be above or below the issue price. 18 Market Capitalisation The market value of a quoted company, which is calculated by multiplying its current share price (market price) by the number of shares in issue is called as market capitalization 19 Book Building Process’ Book Building is basically a process used in IPOs for efficient price discovery. It is a mechanism where, during the period for which the IPO is open, bids are collected from investors at various prices, which are above or equal to the floor price. 20 Offer Price The offer price is determined after the bid closing date. that is after book bulding 21 Cut-Off Price? This issue price is called “Cut-Off Price”. The issuer and lead manager decides this after considering the book and the investors’ appetite for the stock. This is the price after BB process is over. 22 floor price

Floor price is the minimum price at which bids can be made. 23 Price Band In a Book building issue, the issuer is required to indicate either the price band or a floor price in the prospectus. Price Band is decided by consulting different Merchant bankers. 24 Registrar The Registrar finalizes the list of eligible allottees after deleting the invalid applications and ensures that the corporate action for crediting of shares to the demat accounts of the applicants is done and the dispatch of refund orders to those applicable are sent. 25 Draft Offer document’ ‘Draft Offer document’ means the offer document in draft stage. The draft offer documents are filed with SEBI, atleast 21 days prior to the filing of the Offer Document with ROC/SEs. SEBI may specify changes, if any, in the draft Offer Document and the issuer or the lead merchant banker shall carry out such changes in the draft offer document before filing the Offer Document with ROC/SEs. 26 Abridged Prospectus’ Abridged Prospectus’ is a shorter version of the Prospectus and contains all the salient features of a Prospectus. It accompanies the application form of public issues. 27 ‘Lock-in Lock-in’ indicates a freeze on the sale of shares for a certain period of time. SEBI guidelines have stipulated lock-in requirements on shares of promoters mainly to ensure that the promoters or main persons, who are controlling the company, shall continue to hold some minimum percentage in the company after the public issue. 28 Delisting of securities’ The term ‘Delisting of securities’ means permanent removal of securities of a listed company from a stock exchange. As a consequence of delisting, the securities of that company would no longer be traded at that stock exchange.

29 American Depository Receipt An American Depositary Receipt ("ADR") is a physical certificate evidencing ownership of American Depositary Shares ("ADSs"). 30 ADS

An American Depositary Share ("ADS") is a U.S. dollar denominated form of equity ownership in a non-U.S. company. It represents the foreign shares of the company held on deposit by a custodian bank in the company's home country and carries the corporate and economic rights of the foreign shares, subject to the terms specified on the ADR certificate. 31 GDRs Global Depository Receipts (GDRs) may be defined as a global finance vehicle that allows an issuer to raise capital simultaneously in two or markets through a global offering. The underlying shares correspond to the GDRs in a fixed ratio say 1 GDR=10 shares. 32 Contract Note Contract Note is a confirmation of trades done on a particular day on behalf of the client by a trading member. It imposes a legally enforceable relationship between the client and the trading member with respect to purchase/sale and settlement of trades. It also helps to settle disputes/claims between the investor and the trading member. It is a prerequisite for filing a complaint or arbitration proceeding against the trading member in case of a dispute

33 Bonus Shares: Shares issued by the companies to their shareholders free of cost based on the number of shares the shareholder owns. 34 Preference shares: Owners of these kind of shares are entitled to a fixed dividend or dividend calculated at a fixed rate to be paid regularly before dividend can be paid in respect of equity share. They also enjoy priority over the equity shareholders in payment of surplus 35 Bid Price The ‘Bid’ is the buyer’s price. It is this price that you need to know when you have to sell a stock. Bid is the rate/price at which there is a ready buyer for the stock, which you intend to sell. 36 Ask Price The ‘Ask’ (or offer) is what you need to know when you're buying i.e. this is the rate/ price at which there is seller ready to sell his stock. The seller will sell his stock if he gets the quoted “Ask’ price.

37 Commodity FCRA Forward Contracts (Regulation) Act, 1952 defines “goods” as “every kind of movable property other than actionable claims, money and securities”. At present, all goods and products of agricultural (including plantation), mineral and fossil origin are allowed for futures trading under the auspices of the commodity exchanges recognized under the FCRA. 38 Depository Participant (DP) The Depository provides its services to investors through its agents called depository participants (DPs). These agents are appointed by the depository with the approval of SEBI.

39 ISIN ISIN (International Securities Identification Number) is a unique identification number for a security.

40 Custodian A Custodian is basically an organisation, which helps register and safeguard the securities of its clients. Besides safeguarding securities, a custodian also keeps track of corporate actions on behalf of its clients:

41 Rematerialisation From Electronic form to physical form 42 Dematerialisation From Physical form to electronic form 43 NAV (Net asset value)

NAV per unit is simply the net value of assets divided by the number of units outstanding. Buying and selling into funds is done on the basis of NAV-related prices 44 Load A Load is a charge, which the mutual fund may collect on entry and/or exit from a fund. A load is levied to cover the up-front cost incurred by the mutual fund for selling the fund.

45 Classification of MF 1 On the basic of objective 2 On the basic of Flexibiltiy

open ended funds closed ended funds

46 ETF 1 Think of an exchange-traded fund as a mutual fund that trades like a stock. Just like an index fund, an ETF represents a basket of stocks that reflect an index such as the Nifty. 2 By owning an ETF, you get the diversification of an index fund plus the flexibility of a stock.

47 Dividend yield Dividend yield gives the relationship between the current price of a stock and the dividend paid by its’ issuing company during the last 12 months. It is calculated by aggregating past year's dividend and dividing it by the current stock price. 48 Stock split A stock split is a corporate action which splits the existing shares of a particular face value into smaller denominations so that the number of shares increase, however, the market capitalization or the value of shares held by the investors post split remains the same as that before the split. 49 Buy Back A buyback can be seen as a method for company to invest in itself by buying shares from other investors in the market. Buybacks reduce the number of shares outstanding in the market. Buy back is done by the company with the purpose to improve the liquidity in its shares and enhance the shareholders’ wealth. 50 Rolling Settlement Under rolling settlement all open positions at the end of the day mandatorily result in payment/ delivery ‘n’ days later. Currently trades in rolling settlement are settled on T+2 basis where T is the trade day 51 Pay-in Under rolling settlement all open positions at the end of the day mandatorily result in payment/ delivery ‘n’ days later. Currently trades in rolling settlement are settled on T+2 basis where T is the trade day 52 Pay-out

Pay-out day is the day the securities purchased are delivered to the buyers and the funds for the securities sold are given to the sellers by the exchange. 53 Technical Ratios

NCFM\Contents_revised.pdf 54 Market Types 56 Lot Size Every Instrument in securities market is traded as per the lot which means the minimum Qty of that instrument need to be taken. The Lot size depends on the Market and exchange type Suppose in case of Cash Market (NSE and BSE) the Lot size is 1 which means any person can buy even 1 or sell 1 stock. In case of comodity market different instrument has different lot size Chana - 3650 now if an investor wants to buy/sell he needs to buy in the multiple of 3650 In FAO market lot sizes are in multiples of 100 so the minimum contract is of 100 * LTP

57 Tick Size It is the minimum prize that is to be changed at any interval suppose a tick size for a perticular instrument is 0.05 now the minimum prize change is Rs 0.05 that will be registered no less than that prize will be registered

58 NEAT System The NEAT system supports an order driven market, wherein orders match on the basis of time and price priority. All quantity fields are in units and prices are quoted in Indian Rupees. The regular lot size and tick size for various securities traded is notified by the Exchange from time to time

purpose of raising capital..

rpose of assisting, regulating or controlling the

-determined terms with regards to rate and periodicity of

on can buy

ss than that

Financial Markets
The factors which govern these interest rates are mostly economy related and are commonly referred to as macroeconomic factors. Some of these factors are: 1 Demand for money 2 Level of Government borrowings 3 Supply of money 4 Inflation rate 5 The Reserve Bank of India and the Government policies which determine some of the variables mentioned above

Various Short-term financial options available for investment?

1 Savings Bank Account 2 Money Market or Liquid Funds 3 Fixed Deposits with Banks

Percentage Returns 4-5% pa 6-7% 8-8.5% pa

Liquidation high Very easy Low

Various Long-term financial options available for investment?
1 Post Office Savings: 2 Public Provident Fund 3 Company Fixed Deposits 4 Bonds: 5 Mutual Funds

% returns

1 Post Office Savings:

8% PA

Bonus 10% on Principal Amount on completion of 6 years

Liquidation No if before 6 years then No bonus and 5% deduction on Pri Amount

2 Public Provident Fund

8% PA


A withdrawal is permissible every year from the 7th year of the date of opening of the account and the amount of withdrawal will be limited to 50% of the balance at credit at the end of the 4th year Depends on the company The intreset is compounded and is paid monthly,3 monthly,6 monthly or yearly

3 Company Fixed Deposits

6-9% PA


4 Bonds: 5 Mutual Funds

6-9% PA Depends on the period of the Investment


No before the Maturity date.

Who are the Regulators of Security Markets in India? 1 Department of Economic Affairs (DEA), 2 Department of Company Affairs (DCA) 3 Reserve Bank of India (RBI) 4 Securities and Exchange Board of India (SEBI)

What are the Roles of SEBI? 1 Regulating the business in stock exchanges and any other securities markets 2 Registering and regulating the working of stock brokers, sub–brokers 3 Promoting and regulating self-regulatory organizations 4 Prohibiting fraudulent and unfair trade practices 5 Calling for information from, undertaking inspection, conducting inquiries and audits of the stock exchanges, intermediaries, self – regulatory organizations, mutual funds and other persons associated with the securities market.

What are different market Segments 1 Primary Market 2 Secondary Market What are different Market Types? 1 Cash Market 2 Derivatives Market that means Future and Option Market 3 Commodity Market

What are different kinds of issues? 1 Initial Public Offering (IPO) 2 A follow on public offering (Further Issue) 3 Rights Issue 4 A Preferential issue

What is the main difference between offer of shares through book building and offer of shares thro
Price at which securities will be allotted is not known in case of offer of shares through Book Building while in case of offer of shares through normal public issue, price is known in advance to investor. Under Book Building, investors bid for shares at the floor price or above and after the closure of the book building process the price is determined for allotment of shares.

Share through Book building

Price is not known to the investor before the investor bids on the price d In case of BB process suppose a company has issued shares in a price For the shares having a face value of the share as Rs 10 Now if the inve then he will quote a higher price and hence the issue is over subscribed In the case of BB the shares are allotted to the investors according to th

Suppose a Person A has bided for 1000 shares at 150 then it depends o to A suppose company thinks that they should have a large investor bas bided at 140 for 1000 shares then company can issue 750 shares to A a This is the job of a Registrar Note:

1 In India Any Retail investor cant bid for more than one lakh as an Indivi 2 Basis of Allotment should be completed with 15 days from the issue clos 3 As soon as the basis of allotment is completed, within 2 working days th demat account /allotment advice and dispatch of refund order needs to b 4 In case of the BB process the share price depend on the demand of the 5 It would take around 3 weeks after the closure of the book built issue. fo

Normal Public issue

The Price is known to the investor before hand.

The Minimum Number of days for which the bid should be open?

The Book should remain open for a minimum of 3 days.

How Can companies in India raise foreign currency resources?
Indian companies are permitted to raise foreign currency resources through two main sources: a) issue of foreign currency convertible bonds more commonly known as ‘Euro’ issues and b) issue of ordinary shares through depository receipts namely ‘Global Depository Receipts (GDRs)/American Depository Receipts (ADRs)’ to foreign investors

Suppose an Indian Company such as Infosys wants to raise capital from US Then company will issue ordinary shares (ADRs) to US investors. The company will issue the ADS in US denominations that is in dollars. like infy has a share price of Rs 2000 in India than in US the company can issue a ADS at 2000/45 ie $44.4 per ADS ADSs are issued by a depository bank, such as JPMorgan Chase Bank Now the company can be listed in NYSE or NASDAQ and ADS can be traded in the same manner as an American C The underlying shares correspond to the ADRs in a fixed ratio say 1 ADR=10 shares

What are different types of prefrentional shares that are present?
There are two different kinds of Pref Shares 1 Cumulative Preference Shares: 2 Cumulative Convertible Preference Shares: Cumulative Preference Shares: A type of preference shares on which dividend accumulates if remained unpaid. All arrears of preference dividend have to be paid out before paying dividend on equity shares Cumulative Convertible Preference Shares: A type of preference shares where the dividend payable on the same accumulates, if not paid. After a specified date, these shares will be converted into equity capital of the company.

What are the Different types of Bonds?
There are basically of three types 1 Zero Coupon Bond: 2 Convertible Bond: 3 Treasury Bills:

1 Zero Coupon Bond: Bond issued at a discount and repaid at a face value. No periodic interest is paid. The difference between the issue price and redemption price represents the return to the holder. The

buyer of these bonds receives only one payment, at the maturity of the bond. 2 Convertible Bond: A bond giving the investor the option to convert the bond into equity at a fixed conversion price. Short-term (up to one year) bearer discount security issued by government as a means of financing their cash requirements.

3 Treasury Bills:

What is diffrence between Value stock and Growth Stock?
Value Stock The task here is to look for stocks that have been overlooked by other investors and which may have a ‘hidden value’. These companies may have been beaten down in price because of some bad event, or may be in an industry that's not fancied by most investors. Many of these assets still have value, yet that value may not be reflected in the stock's price. Value investors look to buy stocks that are undervalued, and then hold those stocks until the rest of the market realizes the real value of the company's assets. The Value investor is one who looks for the PE Ratios of these stocks

Growth Stocks:

Companies whose potential for growth in sales and earnings are excellent, are growing faster than other companies in the market or other stocks in the same industry are called the Growth Stocks. These companies usually pay little or no dividends and instead prefer to reinvest their profits in their business for further expansions.

What is the difference between Commodity and Financial derivatives?
The basic concept of a derivative contract remains the same whether the underlying happens to be a commodity or a financial asset. Commodity 1 Chana, Gold, Silver etc 2 Due to the bulky nature of the underlying assets, physical settlement in commodity derivatives creates the need for warehousing. 3 the quality of the asset underlying a contract can vary at times.



There are 5 types

1 Future Stock 2 Option Stock 3 Future Index 4 Option Index 5 Future Instrument 2 Financial derivatives, most of these contracts are cash settled. 3 financial assets are not bulky and do not need special facility for storage. 4 the concept of varying quality of asset does not really exist as far as financial underlyings are concerned.

What is a diffrence in Bank and a Depositary?

There are two depositories in India which provide dematerialization of securities. The National Securities Depository Limited (NSDL) and Central Securities Depository Limited (CSDL).

Advantages of depositary ?
1 Immediate transfer of securities 2 No stamp duty on transfer of securities 3 Elimination of risks associated with physical certificates such as bad delivery, fake securities, etc. 4 Reduction in paperwork involved in transfer of securities 5 Reduction in transaction cost 6 Ease of nomination facility 7 Change in address recorded with DP gets registered electronically with all companies in which investor holds securities eliminating the need to correspond with each of them separately

Dividend yield Dividend yield gives the relationship between the current price of a stock and the dividend paid by its’ issuing company during the last 12 months. It is calculated by aggregating past year's dividend and dividing it by the

current stock price. Consider a company having Share price: Rs. 360 Annual dividend: Rs. 10 Dividend yield: 2.77% (10/360) A higher dividend yield has been considered to be desirable among investors Dividend yield therefore can be only one of the factors in determining future performance of a company.

In short company should have

1 Higher Divedents 2 Higher Divedent Yields Stock is underpriced Stock is overerpriced

1 higher divedent yields 2 lower divedent yields

Why is Stock Split done?
If the value of the stock doesn't change, what motivates a company to split its stock? 1 There are mainly two important reasons. As the price of a security gets higher and higher, some investors may feel the price is too high for them to buy, or small investors may feel it is unaffordable. Splitting the stock brings the share price down to a more attractive level 2 Splitting a stock may lead to increase in the stock's liquidity, since more investors are able to afford the share and the total outstanding shares of the company have also increased in the market.

How is technical analysis is done ?
There are three major areas of the technical analysis that are involved 1 Industry Analysis 2 Corporate Analysis 3 Finacial Analysis

1 Industry Analysis Companies producing similar products are subset (form a part) of an Industry/Sector. For example, National Hydroelectric Power Company (NHPC) Ltd., National Thermal Power Company (NTPC) Ltd., Tata Power Company (TPC) Ltd. etc. belong to

the Power Sector/Industry of India. It is very important to see how the industry to which the company belongs is faring. Specifics like effect of Government policy, future demand of its products etc. need to be checked. At times prospects of an industry may change drastically by any alterations in business environment. For instance, devaluation of rupee may brighten prospects of all export oriented companies. Investment analysts call this as Industry Analysis.

2 Corporate Analysis How has the company been faring over the past few years? Seek information on its current operations, managerial capabilities, growth plans, its past performance vis-à-vis its competitors etc. This is known as Corporate Analysis. 3 Finacial Analysis If performance of an industry as well as of the company seems good, then check if at the current price, the share is a good buy. For this look at the financial performance of the company and certain key financial parameters like Earnings Per Share (EPS), P/E ratio, current size of equity etc. for arriving at the estimated future price. This is termed as Financial Analysis.

minimum investment period Nil Nil 1 month but to get more returns than Money Market need to invest for more than 6 months

Min investment Minimum Maximum Tax Benefit Period of period Investment Investment under Sec 80 C Maturity

6 years


300000 Yes

6 years

7 years

1000 NA

Yes No Tax on Interest 15 years

6 months 4years



1 year

1000 NA

The interest received is after deduction of taxes. NO There are different type of bonds some have tax benfits and some doesn't have

Depends on the company

The interest is paid after the maturity of the bond

ng and offer of shares through normal public issue?

he investor bids on the price during the book building process. ny has issued shares in a price range of Rs 100-150 share as Rs 10 Now if the investor thinks that it is a discounted price ce the issue is over subscribed in the reverse case the issue is undersubscribed. o the investors according to the price he has bided

shares at 150 then it depends on the company to give how many shares hould have a large investor base then they will also give to B who has ny can issue 750 shares to A and 250 shares to B

more than one lakh as an Individual this is the rule given by SEBI with 15 days from the issue close date. pleted, within 2 working days the details of credit to patch of refund order needs to be completed depend on the demand of the stock and the supply. osure of the book built issue. for a company to be listed.

S at 2000/45 ie $44.4 per ADS

ame manner as an American Comp

of preference

umulates, if not

erlooked by other se companies may have ent, or may be in an

e stock's price.

ued, and then hold those alue of the company's

os of these stocks

earnings are n the market or other

o reinvest their profits

Mutual Funds
What are the Important factors on which the functioning takes place? 1 NAV 2 Fund Manager 3 Entry Load 4 Exit Load 5 On the basis of Objective 6 On the basis of Flexibility 7 Active Fund Management NAV NAV per unit is simply the net value of assets divided by the number of units outstanding. Buying and selling into funds is done on the basis of NAV-related prices. The NAV of a mutual fund are required to be published in newspapers. The NAV of an open end scheme should be disclosed on a daily basis and the NAV of a close end scheme should be disclosed at least on a weekly basis Entry Load A Load is a charge, which the mutual fund may collect on entry and/or exit from a fund. A load is levied to cover the up-front cost incurred by the mutual fund for selling the fund. It also covers one time processing costs. the load that is levied on the investor when entering in the MF trade. Funds usually charge an entry load ranging between 1.00% and 2.00% Exit Load The load that is leived on the investor when he exit from the MF Generaly MF companies charges Exit loads which vary between 0.25% and 2.00%.

No Load Fund Some Companies doesnot charge any entry or Exit loads these funds are called the No Load funds.

Calculation of Investment in MF Principal Amount Current NAV Entry Load Exit Load Current NAV 10000 13 1% 0.50% 15

On the buy Date

On the Exit Date

Returns of a MF depends on the NAV change over a period of time No of Units that investor will get on putting with NAV = Factor added because of entry Load= Net NAV for the investor = 13 0.13 13.13

No of units the investor will get =


On the Exit date = Factor because of exit Load= Net NAV for the investor =

15 0.08 14.93

The investor therefore receives


Risks that are involved in MF are as follows
1 Market risk 2 Non-market risk 3 Interest rate risk 4 Credit risk market is not doing very well than funds lose money Any indivisual company or the Indurstry is not doing well then the bonds intrest rates are not doing well going into negatives. In debt

Objective of the mutual fund.
Basically there are six types of MF they are 1 Equity Funds/ Growth Funds 2 Tax Saving Funds 3 Debt/Income Funds 4 Liquid Funds/Money Market Funds 5 Gilt Funds 6 Balanced Funds

1 Equity Funds/ Growth Funds Funds that invest in equity shares are called equity funds. They carry the principal objective of capital appreciation of the investment over the medium to long-term. They are best suited for investors who are seeking capital appreciation. There are different types of equity funds such as Diversified funds, Sector specific funds and Index based funds. 1(a) Diversified funds These funds invest in companies spread across sectors. These funds are generally meant for risk-averse investors who want a diversified portfolio across sectors.

1(b) Sector funds These funds invest primarily in equity shares of companies in a particular business sector or industry. These funds are

targeted at investors who are bullish or fancy the prospects of a particular sector.

1(c) Index funds These funds invest in the same pattern as popular market indices like S&P CNX Nifty or CNX Midcap 200. The money collected from the investors is invested only in the stocks, which represent the index. For e.g. a Nifty index fund will invest only in the Nifty 50 stocks. The objective of such funds is not to beat the market but to give a return equivalent to the market returns.

2 Tax Saving Funds These funds offer tax benefits to investors under the Income Tax Act. Opportunities provided under this scheme are in the form of tax rebates under the Income Tax act. 3 Debt/Income Funds These funds invest predominantly in high-rated fixed-income-bearing instruments like bonds, debentures, government securities, commercial paper and other money market instruments. They are best suited for the medium to long-term investors who are averse to risk and seek capital preservation. They provide a regular income to the investor. 4 Liquid Funds/Money Market Funds These funds invest in highly liquid money market instruments. The period of investment could be as short as a day. They provide easy liquidity. They have emerged as an alternative for savings and shortterm fixed deposit accounts with comparatively higher returns. These funds are ideal for corporates, institutional investors and business houses that invest their funds for very short periods.

5 Gilt Funds These funds invest in Central and State Government securities. Since they are Government backed bonds they give a secured return and also ensure safety of the principal amount. They are best suited for the medium to long-term investors who are averse to risk.

6 Balanced Funds These funds invest both in equity shares and fixed-income-bearing instruments (debt) in some proportion. They provide a steady return and reduce the volatility of the fund while providing some upside for

capital appreciation. They are ideal for medium to long-term investors who are willing to take moderate risks.

On the basis of Flexibility
1 Open-ended Funds 2 Close-ended Funds 1 Open-ended Funds These funds do not have a fixed date of redemption. Generally they are open for subscription and redemption throughout the year. Their prices are linked to the daily net asset value (NAV). From the investors' perspective, they are much more liquid than closed-ended funds. 2 Close-ended Funds These funds are open initially for entry during the IPO and thereafter closed for entry as well as exit. These funds have a fixed date of redemption. One of the characteristics of the close-ended schemes is that they are generally traded at a discount to NAV; but the discount narrows as maturity nears. These funds are open for subscription only once and can be redeemed only on the fixed date of redemption. The units of these funds are listed on stock exchanges (with certain exceptions), are tradable and the subscribers to the fund would be able to exit from the fund at any time through the secondary market.

Different investment plans that Mutual Funds offer?
1 Growth Plan 2 Dividend Plan 1 Growth Plan A growth plan is a plan under a scheme wherein the returns from investments are reinvested and very few income distributions, if any, are made. The investor thus only realizes capital appreciation on the investment. 2 Dividend Plan Income is distributed from time to time. This plan is ideal to those investors requiring regular income.

Fund Offer document?
1 § Invest ment objectives 2 § Risk factors and special considerations 3 § Summary of expenses 4 § Constitution of the fund 5 § Guidelines on how to invest 6 § Organization and capital structure 7 § Tax provisions related to transactions 8 § Financial information

How the fund will invest or the investing style? 1 Active Fund investment 2 Passive fund investment

1(a) Growth Investing Style The primary objective of equity investment is to obtain capital appreciation. A growth manager looks for companies that are expected to give above average earnings growth, where the manager feels that the earning prospects and therefore the stock prices in future will be even higher. Identifying such growth sectors is the 2(b) Value investment Style A Value Manager looks to buy companies that they believe are currently undervalued in the market, but whose worth they estimate will be recognized in the market valuations eventually.

Technical Ratios that are used to evaluate the companys performance on the basis of the Annual Reports
They are Basically Clasified into 3 types. 1 Liquidity ratios 2 Leverage/Capital structure ratio, 3 Profitability ratios.

S No Name


How it is calculated

1 Current ratio

Liquidity ratios

Current Liabilities/Current Assets

2 Acid-test Ratio

Liquidity ratios

Current Liabilities/Quick Assets

3 Turnover Ratios:

Liquidity ratios

Inventory Turnover 4 Ratio

Liquidity ratios --> Turnover Ratio

AverageInventory/ CostofGoodsSold

Debtors’ Turnover 5 Ratio

Liquidity ratios --> Turnover Ratio

. AverageTotalAssets/ Net.Sales

Total Assets turnover Liquidity ratios --> 6 ratio Turnover Ratio

Fixed Assets turnover Liquidity ratios --> 7 ratio Turnover Ratio

NetFixedAssets/ Net.Sales

Leverage/Capital 8 structure Ratios: 9 Debt-Equity ratio

Leverage/Capital structure Ratios: Leverage/Capital structure Ratios: Total Equity / Total Debt

10 Debt-Asset Ratio

Leverage/Capital structure Ratios:

Total Assets / Total Debt

Leverage/Capital 11 Interest Coverage ratio structure Ratios:

Debt Service Coverage Ratio 12 (DSCR) 13 Gross Profit Ratio (%) 14 Net Profit Ratio (%) Return on Total 15 Assets Return on Capital 16 Employed

Leverage/Capital structure Ratios: Profitability ratios: Profitability ratios: Profitability ratios: Profitability ratios:

Earnings Before Interest and Taxes/Interest Depreciation + OtherNoncashExpenditure + Interest on term loan + Profit after Tax / Interest onTerm loan Repayment of term loan Net Sales / Gross Profit * 100 Net Sales / Net Profit * 100 Profit Before Interest And Tax / FixedAssets + CurrentAssets Net ProfitAfterTax / TotalCapital Employed Net Profit AfterTax / AverageTotal Shareholders Equity or NetWorth

Return on 17 Shareholders’ Equity

Profitability ratios:

Earnings Per Share 18 (EPS): Profitability ratios: Price-earnings ratios = 19 P/E Ratio Profitability ratios:

Net Profit AvailableToThe Shareholder / Numberof Ordinary Shares Outstanding

Market Price per Share / EPS

Remarks The current ratio measures the ability of the firm to meet its current short-term solvency The current ratio measures the ability of the firm to meet its current liabilities from the current assets. Higher the current ratio, greater the shortterm solvency The acid-test ratio is a measurement of firm’s ability to convert its current assets quickly into cash in order to meet its current liabilities Generally speaking 1:1 ratio is considered to be satisfactory.. Turnover ratios measure how quickly certain current assets are converted into cash or how efficiently the assets are employed by a firm. Where, the cost of goods sold means sales minus gross profit. ‘Average Inventory’ refers to simple average of opening and closing inventory Higher the ratio, more the efficient of inventory management. The ratio shows how many times accounts receivable (debtors) turn over during the year.Higher the debtors turnover, the greater the efficiency of credit management. Total Assets turnover ratio measures how efficiently all types of assets are employed. Fixed Assets turnover ratio measures sales per rupee of investment in fixed assets. In other words, how efficiently fixed assets are employed. Higher ratio is preferred.

Long term financial strength or soundness of a firm is measured in terms of its ability to pay interest regularly or repay principal on due dates or at the time of maturity. Debt-Equity ratio reflects relative contributions of creditors and owners to finance the business. Total debt comprises of long term debt plus current liabilities. The total assets comprise of permanent capital plus current liabilities. Higher the interest coverage ratio better is the firm’s ability to meet its interest burden. The lenders use this ratio to assess debt servicing capacity of a firm.

Financial institutions calculate the average DSCR for the period during which the term loan for the project is repayable.

EPS measures the profit available to the equity shareholders per share, that is, the amount that they can get on every share held. It is calculated by dividing the profits available to the shareholders by number of outstanding shares. The profits available to the ordinary shareholders are arrived at as net profits after taxes minus preference dividend

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